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How to Create a Restaurant Menu Pricing Strategy
Sevenrooms
5 min read
Apr 11, 2023
Sevenrooms
5 min read
Apr 11, 2023
With inflation rising at unprecedented rates, many restaurants have been increasing menu prices to combat higher operating costs. According to the National Restaurant Association, menu prices increased 8.2% between January 2022 and January 2023.
If you’ve been adjusting menu prices haphazardly — or haven’t increased them at all — it might be time to create formal menu pricing strategies for your restaurant to ensure profitability.
This guide to menu pricing strategies will help you create a game plan that considers food costs, perceived value and demand.
Table of contents:
While hospitality is the focus of the restaurant industry, a restaurant is first and foremost a business — following your gut or doing things the way grandma used to do them won’t cut it when it comes to making decisions. When pricing menu items, restaurateurs should base prices on data to guarantee they profit from each menu item.
Restaurant profit margins are notoriously slim: between 3% and 5% for a full-service restaurant and 6% to 9% for a quick-service restaurant. Developing menu pricing strategies can help cushion these margins to weather storms in challenging times and grow during prosperous times. You can implement these pricing strategies across the board, including new items you introduce.
The bottom line: Menu pricing strategies help you make smarter decisions, earn more money and save time.
While there are a number of strategies for pricing menu items, using the food cost percentage menu pricing strategy is a good place to start because it ensures you generate a profit from each item. We suggest mastering food-cost-percentage-based pricing, before moving on to the other strategies we list at the end of this guide.
Use your inventory management system or POS system to determine how much each dish or beverage costs your restaurant to make. To manually calculate the cost of goods sold (COGS) per serving, divide the bulk inventory costs of the raw materials in each dish by the number of servings you can make out of it. Finally, add up the cost per serving for each ingredient in a dish to get your cost per plate.
Example: Calculating the Costs of a Cheese Pizza at a Pizza Parlor
A 50lb bag of flour costs $50. If each bag yields 100 cups and you need 4 cups to make one pizza, you’re spending $2 per serving of flour. After repeating this process for the remaining ingredients in the recipe, you discover it costs your restaurant $3 to make one pizza.
The next step in creating a menu pricing strategy is calculating non-food overhead costs. Check your balance sheet or POS reports and note how much you spend on labor, rent, utilities, technology, professional services, paper goods and other expenses.
Example: Restaurant Operating Costs
According to your restaurant’s balance sheet, you spend $20,000 per month, on average, on non-food operating costs, including labor, rent, utilities and other miscellaneous expenses.
Food cost percentage (FCP) indicates how much menu items cost your restaurant to make relative to how much you sell them for. To calculate food cost percentage (i.e., whether you’re earning a profit on items sold), add up your non-food operating costs, divide that figure by your sales, subtract the result from one, then multiply that figure by 100.
Food Cost Percentage = [1 – (Sum of Operating Costs/Revenue)]*100
Food Cost Percentage Benchmark: The average food cost percentage for restaurants ranges between 25% and 40%. Fast food establishments spend less on food, and can have food costs as low as 20%, while fine dining restaurants have FCPs closer to 40%.
Example: Pizza Parlor Food Cost Percentage
From the previous example, your monthly non-food operating costs are $20,000 and your average monthly revenue is $26,666. Using the FCP formula, you learn that your FCP is 25%. If this percentage feels too high, you might consider raising your menu prices.
Food Cost Percentage = [1 – (Sum of Operating Costs/Revenue)]*100
FCP = [1 – ($20,000/$26,666)]*100=[1-.75]*100=.25*100=25%
Use your food cost percentage to establish the minimum you can charge for each item to make a profit. Do this by dividing the cost of each serving to your restaurant (from step one) by your desired FCP (from step three).
Minimum Price = Food Cost Per Serving/Food Cost Percentage
Example: Pizza Parlor Menu Price
If it costs $3 to make a pizza, and your FCP is 25%, you’ll need to charge at least $12 for a cheese pizza.
Minimum Price = Food Cost Per Serving/Food Cost Percentage
Minimum Price = $3/25%=$12
While food and operating costs should be the basis for your menu pricing strategy, the following factors can also impact prices:
FYI: The more guest data you can collect, the better you can understand what they’re willing to pay. SevenRooms’ Hospitality CRM can help you gather guest preferences and demographic information to inform your menu pricing strategies.
After setting minimum prices based on the food cost percentage pricing formula, you can tweak price tags by experimenting with these other pricing methods:
Rather than pricing every item on your menu individually, you can offer a prix fixe menu or all-you-can-eat meal for a fixed price. A limited menu can reduce decision fatigue for guests, while an unlimited option makes them feel like they’re getting a great deal. Once again, leverage your costs and customer data to determine a high-profit fixed price that appeals to your clientele.
Instead of pricing menu items based on a consistent ideal food cost percentage, you can price complementary items to encourage upselling and cross-selling.
The trick is to engineer your menu. Here’s how it works:
If you sell multiple sizes of the same item, price the largest size with the highest profit margin. Then, price the smaller sizes so that they still earn a profit, but don’t seem like as good a deal to customers to encourage them to buy the biggest size.
For example, a movie theater might sell a large popcorn for $8, a medium for $7 and a small for $6. Customers will likely opt for the large bag, which is only $1 more than the “better” deal and $2 more than the “good” deal.
This menu pricing strategy also works well when you sell combo meals. Set the “best” price based on the cost of an entree, beverage and side. Then set a “better” price based on customers purchasing an entree and one add-on item and a “good” price based on just the entree.
The more you know about your restaurant and its customers, the better you can optimize your prices. The menu pricing strategies in this guide are good starting points, but the best decisions are backed by data. Equip your restaurant with tools that collect information about your customers and their choices.
SevenRooms is a restaurant guest experience platform that makes it easier to understand your customers at scale. Book a demo today.
Menu pricing strategies are tactics restaurants use to set prices for their menu items. Examples of strategies include food-cost-percentage-based pricing, fixed pricing, and good, better and best pricing.
The first step in menu pricing is knowing your restaurant’s food costs. You need to understand how much each item on your menu costs your restaurant to make to set profitable prices.
